"A wealth of information creates a poverty of attention." - Herbert Simon
Herbert Simon was born on June 15th in 1916. Simon was a pioneer in the study of decision-making among individuals and organizations. He earned the Nobel Prize in 1978 for his work. Simon’s research applies to numerous fields, including political science, public administration, computer science, psychology, and economics.
Simon’s research was critical in breaking down the assumptions of the prevailing economic theories, which relied on “rational economic man”. This rational man, who laid the foundation for classic economic models, is assumed to consistently make optimal decisions to maximize his own wealth (utility). Unfortunately, this is not a realistic interpretation of how people generally operate.
Broadly stated, the task is to replace the global rationality of economic man with a kind of rational behavior that is compatible with the access to information and the computational capacities that are actually possessed by organisms, including man, in the kinds of environments in which such organisms exist.[i]
We do not think about utility functions and decision maximization theories every time we face a choice. Instead, we rely on heuristics and/or find solutions that meet a minimal level of need. Simon coined the term “satisficing” to account for this real-world behavior. Satisficing is a combination of satisfy and suffice. People satisfice when an optimal decision is unknowable either due to informational limitations or an inability to compute the optimal choice. For complex decisions, both may pose a challenge. Accepting the first alternative that meets a minimal requirement is satisficing.
We here at Jackson Creek are big believers in his body of work which contributed to the rise of behavioral finance. We are more than just fans. Our philosophy leans on behavioral concepts and decision theories that he brought to the forefront. Simon’s work shed light on the fact there is a limit to rational decision-making when faced with complex and uncertain variables. This is true in investing. Inefficiencies arise as market participants, individually and collectively, make routine errors due to inherent biases affecting their ability to make impartial, unbiased decisions.
Thank you, Herbert! Jackson Creek will continue to incorporate the ideas you championed long ago. As a sign of our admiration, we named our proprietary portfolio management system after you.
Blurred screenshot of "SIMON". Jackson Creek Investment Advisors.
[i] Simon, Herbert. “A Behavioral Model of Rational Choice”. Quarterly Journal of Economics, Feb. 1955, 69, 99-118.